March monthly market update - Reflections on February 2025

Strong corporate earnings, interest rate expectations and global trade tensions drive market movements, while inflation and policy decisions add to the uncertainty.

The FTSE 100 soared to a record high, bolstered by strong company earnings and improved optimism over interest rate cuts. Sterling also climbed to its highest level against the dollar this year, buoyed by better-than-expected GDP data that reinforced confidence in the UK economy. Meanwhile, the dollar weakened amid relief over US tariff concerns. Despite President Trump’s tariff threats on imports, the FTSE has remained largely unfazed.

UK inflation picked up more sharply than expected at the start of the year, complicating the Bank of England’s plans for interest rate cuts. The headline inflation rate rose to 3% in January, up from 2.5% in December. The Bank lowered interest rates by a quarter percentage point, bringing the cost of borrowing down to 4.5%. It also said it expected the economy to grow by 0.75% this year, down from its November forecast of 1.5%, and for inflation to rise before falling back.

Meanwhile, the country narrowly avoided a recession after the economy saw unexpected growth in the final quarter of 2024, helping ease pressure on Chancellor Rachel Reeves after activity flatlined during the summer months. The UK economy grew 0.1% in the final quarter of 2024 after zero growth in the previous three months.

Average wages continued to outpace inflation, while unemployment remained unchanged despite warnings from businesses that Reeves’s autumn Budget could lead to job losses. Pay rose 3.4% between October and December compared with the same period a year ago, while the unemployment rate remained steady at 4.4%. Consumer spending also rose at its fastest pace since May last year, boosted by the January sales.

US stocks dip

US stocks fell amid rising tariff uncertainty and concerns about weakening consumer demand. Trump warned of a possible 25% tariff on EU imports and did not rule out taxes on British goods. He confirmed a 25% tariff on Canadian and Mexican imports and threatened an additional 10% on Chinese goods. Trump also announced new 25% tariffs on all steel and aluminium imports and warned of further tariffs on countries that impose VAT on US goods.

The tariffs have raised concerns about a global trade war that could slow economic growth and push inflation higher. While markets have seen some volatility as a result, they have remained relatively steady overall.

US inflation rose unexpectedly in January, fuelling speculation about the timing of the Federal Reserve’s next interest rate cut. The annual rate increased to 3%, up from 2.9% in December. Meanwhile, job growth slowed, with 143,000 jobs added last month, while the unemployment rate edged down to 4% from 4.1%. Economic growth in the US softened at the end of 2024 but remained solid. GDP expanded by 2.3% in the final quarter, compared with 3.1% in the previous three months.

After taking office, Trump vowed sweeping changes, from cuts to government spending and the federal workforce to mass deportations and higher tariffs on many imports from its trading partners. These plans have added uncertainty to the outlook for the world’s largest economy.

The Fed held interest rates steady in January amid uncertainty about Trump’s impact on the economy. Federal Reserve Chairman Jerome Powell also said the bank’s concerns about the job market had subsided. The Fed is expected to cut interest rates two or three times in 2025, with greater uncertainty for the second half of the year.

European stocks soar

European stocks have performed strongly this year, hitting record highs despite the threat of an escalating global trade war. However, uncertainty is mounting over relations with the US after Trump’s tariff threats. Meanwhile, Kyiv and Europe were excluded from peace talks with Russia.

Euro area inflation rose 2.5% year-on-year in January, exceeding expectations and edging up from December’s 2.4%. The European Central Bank (ECB) cut rates in January by a quarter-point to 2.75% in an effort to support economic growth and tackle stubborn inflation. While inflation rose for the third month in a row, it is not expected to alter plans to continue lowering interest rates.

The region's economy performed slightly better than first estimated in the final quarter of 2024, though growth remained subdued. Seasonally adjusted GDP increased by just 0.1% quarter-on-quarter, down from 0.4% in the previous period. Germany and France saw contractions, while Italy stagnated, leaving Spain and smaller economies to prevent an overall decline. Productivity challenges continue to weigh on the region, with early signs suggesting a sluggish start to 2025.

China ramps up trade war

China imposed tariffs on approximately $14 billion worth of US goods as trade tensions between the two countries escalated. The levies, ranging from 10% to 15%, targeted various US exports, including liquefied natural gas, coal, crude oil and farm equipment. Chinese authorities also launched an anti-monopoly investigation into tech giant Google.

Meanwhile, China’s consumer inflation accelerated in January, driven by increased spending during the Lunar New Year. Official data showed the consumer price index rose 0.5% year-on-year, up from 0.1% in December.

The rise was fuelled by higher food costs, economic stimulus measures and seasonal demand, as holiday spending typically lifts prices. The data offers a rare boost as China grapples with weak consumer confidence, a property downturn and escalating trade tensions with the US.

Chinese consumers shattered box office and travel records over the Lunar New Year holiday, while domestic spending jumped. Box office receipts hit a record $1.3 billion, while travel reached a single-day high on 3 February. However, this spending spree has not yet led to a recovery in the consumer economy.